Two hundred and sixty-three million pounds – this was the combined tax bill handed to various government departments for IR35 non-compliance recently.
Put differently, HMRC hit a number of government departments with IR35 bills to the tune of £263m for mistakes made when implementing the very rules created in Westminster.
The figure itself was one of the key takeaways from the Public Accounts Committee’s damning review of IR35 reform, published last month.
For those not up to speed, IR35 reform saw public sector organisations and medium and large private businesses become responsible for assessing the IR35 status of contractors, with the fee-paying party (recruiters or the client) liable in the event of non-compliance.
Following the publication of ’Lessons from implementing IR35 reforms’, in which both the government and HMRC were criticised for not understanding the very rules they designed, oil and gas and energy companies have voiced their concerns to Qdos.
We have been asked by businesses in this sector what they can do to avoid the same fate. How can they ensure their IR35 compliance if the government can’t? And, ultimately, is IR35 reform manageable?
IR35 reform is manageable
To make it absolutely clear, IR35 reform is manageable. This is despite the government’s inability to adhere to the rules they created, enforce and insisted on reforming.
However, energy businesses can learn a lot from the mistakes made by the Ministry of Justice (MOJ), Defra, HM Courts & Tribunal Service, the Department of Work and Pensions (DWP) and the Home Office.
CEST poses a major risk
The common theme is HMRC’s Check Employment Status for Tax (CEST) tool, which was used by each of these departments to assess the IR35 status of contractors. My advice to businesses is to avoid CEST entirely. Its use is not mandatory.
But if the decision of whether to use it or not is out of your hands – for example, if you’re a recruitment agency and the end client insists on its use – a second, independent opinion, is vital.
Why? Well, HMRC will not necessarily stand by the results provided by CEST, which overlooks fundamentally important aspects of the IR35 legislation. And the tool itself can’t determine if a contract belongs inside or outside IR35 around 20% of the time.
Penalties have kicked in
£15m of the MOJ’s eye-watering £72.1m IR35 bill was made up of a financial penalty, issued due to the “careless application” of the rules. This is especially important to private sector businesses after the 12-month ‘soft landing’ (where HMRC wouldn’t penalise businesses) expired in April of this year.
The key takeaway here is that HMRC will have no hesitation in fining businesses that have taken a lax approach to IR35 reform. Compliance, therefore, must be prioritised on an ongoing basis.
HMRC is keen to prove a point
The headline figure – £263m – is staggering. But while publicly-funded government departments won’t feel the full financial impact of these liabilities, private sector energy businesses will.
In recent months, HMRC has been busy carrying out compliance checks in the energy sector – approaching a number of businesses. And I very much doubt the tax office would have any hesitation in aggressively pursuing firms in space suspected of misapplying the rules.
Given HMRC’s appetite for tax investigations is growing – with the number of investigations rising by 9% in the UK in the six months to December 2021 – it’s vital that businesses are confident in their compliance and able to stop a potential enquiry in its tracks, which is equally important.
My parting thought
To recap, above all else, these tax bills issued by HMRC in the public sector have shined the light yet again on the importance of prioritising IR35 compliance, which energy businesses can do by:
– Not relying on HMRC’s tool (CEST) when assessing IR35 status
– Carrying out rigorous, case-by-case IR35 determinations
– Not blanket-placing contractors inside (or even outside) IR35
– Maintaining a clear audit trail, which will be vital in shutting down an IR35 enquiry
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